B Law & Tax
27 October 2023

Tax advisor: How to evaluate a company’s shares and participations for tax purposes?

The proper evaluation of a company’s shares and participations is essential in various circumstances. Determining the exact value of shares and participations is crucial to ensure fair and equitable agreements, whether it’s in the sale of shares or participations, family transfers, mergers, acquisitions, the issuance of new shares or participations, or the liquidation of companies.

However, the valuation of shares and participations can be a complex process, as there is no single valuation method.

According to Article 353.1 of the Capital Companies Law, in case of disagreement between the company and the shareholder regarding the valuation of social shares or shares in any of the following aspects:

  1. The fair value of social shares or shares.
  2. The person or persons responsible for the valuation.
  3. The procedure to be followed to carry out the valuation.

In such cases, these shares or shares will be assessed by an independent expert appointed by the commercial registrar of the company’s registered office, at the request of the company or any of the shareholders holding shares or participations subject to valuation.

A starting point for the valuation could be to follow the valuation criteria established in Article 16 of the Wealth Tax Law.

 

Cases in which it is necessary to evaluate shares or stakes

The evaluation of shares and stakes is typically carried out in the following scenarios:

  1. Sale of shares or stakes: When a shareholder decides to sell their shares or stakes in a company, it is essential to determine their value to facilitate a fair transaction for both parties.
  2. Transfer of shares or stakes to heirs: In family businesses, the succession of the founder represents a critical moment. Evaluating shares and stakes in inter vivos or mortis causa inheritance is essential to establish their value in terms of inheritance and tax obligations.
  3. Integration of new partners through capital increases: When a new partner is added to the company, it is necessary to calculate the value of the shares or stakes to be allocated to them.
  4. Mergers: It is crucial to know the value of the shares or stakes, both of the acquiring and acquired companies, in the context of corporate mergers.
  5. Issuance of new shares or stakes: When the company issues new shares or stakes, their value needs to be determined.
  6. Company liquidation: In the process of liquidating a company, the value of the shares or stakes of the shareholders must be calculated to facilitate the distribution of the company’s net assets.

 

Valuation of shares and stakes in accordance with the Wealth Tax Law

The Wealth Tax Law establishes the method for valuing the shares or stakes of partners in the social capital of cooperatives and other entities as follows:

For cooperatives, the valuation is based on the total amount of paid-up social contributions, whether mandatory or voluntary, as reflected in the last approved balance sheet. Additionally, any unrecovered social losses are deducted, if applicable.

In the case of other entities, the valuation is performed according to the theoretical value resulting from the last approved balance sheet. However, this balance sheet must have undergone mandatory or voluntary review and verification with a favorable audit report.

In situations where the balance sheet has not been audited or the audit report is unfavorable, the valuation is carried out using the highest value of the following three criteria:

  1. The theoretical value resulting from the last approved balance sheet: This method is the most commonly used. It is calculated by dividing the net equity of the company by the number of shares or stakes.
  2. Nominal value: This value is the one stated in the company’s founding documents.
  3. Value calculated by capitalizing 20% of the average profits of the company over the three fiscal years preceding the tax accrual date. To calculate this value, the average profits of the company in those three fiscal years are considered, including distributed dividends and allocations to reserves, except those related to balance sheet regularization or updating. The formula for this calculation is as follows:

Value = [(B1 + B2 + B3) / 3] x (100/20)

Where B1, B2, and B3 represent the profits for each of the three fiscal years closed before the tax accrual date.

The valuation of shares and stakes in the social capital or equity fund of collective investment institutions will be conducted using the net asset value as of the tax accrual date. In this process, the assets included in the balance sheet, in accordance with the specific regulations governing their particular legislation, will be taken into account. Additionally, outstanding obligations to third parties may be deducted.

In the case of cooperatives, the valuation of the shares of the partners will be based on the total amount of paid-up social contributions, whether mandatory or voluntary, as reflected in the last approved balance sheet. In situations where there are unrecovered social losses, these will be deducted.

It is important to note that, regardless of the situation, entities must provide certificates to partners or participants reflecting the corresponding valuations.

 

Example of Valuation of Shares and Stakes

In the example of the valuation of shares and stakes for the company Smart Creations, LLC, the resulting values are as follows:

  1. Theoretical Value: €3.27 per share. This is obtained by dividing the theoretical value from the last approved balance sheet (€9,800.50) by the total number of social shares (3,000).
  2. Nominal Value: €1 per share. This is obtained by dividing the social capital (€3,000) by the total number of social shares (3,000).
  3. Value resulting from capitalization at 20% of the average profit:

   – We add the net result of the last three fiscal years: €6,800.50 (€3,025 + €2,750 + €1,025.50).

   – Then, we apply the capitalization formula at 20%: (€6,800.50 / 3) x (100/20) = €11,334.166.

   – Finally, we divide the result by the total number of social shares (3,000), which gives us €3.78 per share.

In this case, the value of shares for Smart Creations, LLC can be calculated in three different ways, depending on which method is used for valuation. Each of these methods provides a slightly different value per share, which can be relevant for transactions or decisions related to the company’s shares.

 

Other Valuation Methods

It’s true that, in addition to the valuation methods established by the Wealth Tax Law, there are more sophisticated valuation systems that can provide a more precise valuation of shares or social stakes. Some of these more advanced methods include:

  1. Net Asset Value: This approach involves valuing the company’s assets and liabilities at their current market value. This may require a detailed assessment of tangible and intangible assets, as well as the company’s debt and other obligations.
  2. Discounted Cash Flow (DCF) Valuation: This method is based on estimating and discounting the expected future cash flows of the company. It is a more complex approach that involves projecting future revenues and expenses and discounting these cash flows to their present value.

These more advanced methods can be especially useful in situations where a more precise and detailed valuation is required, such as in mergers and acquisitions, valuing growing companies, or in the case of companies with complex assets or cash flows. However, it’s important to note that these methods often require a deep understanding of finance and valuation, as well as the availability of accurate and up-to-date financial data.

Additionally, as mentioned in the summary, it’s essential to consider the legal and tax rules governing these valuations and, in many cases, seek professional advice to ensure that the valuations comply with applicable legal and tax requirements.

 

 

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